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GCC countries need to implement ambitious, economically diversified industrial and tourism strategies

Heading for greater domestic competitiveness and a presence in foreign markets seen as way to avoid market volatilities

Al Mazaya Holding Company’s Weekly Real Estate Report has revealed that a sustained decline in oil revenues will stimulate factors for economic diversification of regional economies and the development of non-oil production sectors – mainly the industrial sector, which is already one of the region’s most significant income sources.

The general mood for investment in GCC countries remains strong and there are increasingly good indicators that are encouraging direct investments in the industrial sector. This comes in light of indicators showing the GCC countries’ share of direct foreign investment (DFI) amounted to USD30 billion at the end of 2015.

With GCC countries increasingly seen to be encouraging foreign investment, this has proven to have had a positive impact on the ability of the economies of these countries to withstand successive economic crises and oil price fluctuations. GCC countries have had to define clear policies for development based on integrated efforts in the financial and economic sectors to attract foreign investment. Al Mazaya’s Report fully supports efforts for laying down long-term ambitious strategies for development of the economic sector.

In order to be successful, Al Mazaya’s Report has identified that the approval of relevant laws and regulations, providing facilities and motivations for foreign investors and attracting all that boosts the competitiveness of the GCC industries, is needed. Despite many achievements in this domain, GCC countries are still required to exert greater efforts to encourage foreign investment in vital sectors.

UAE’s economic diversification: A regional benchmark

According to Al Mazaya’s Report, we cannot talk about diversification of income resources without reference to the successes already achieved by the emirate of Dubai and the UAE as a whole. Economic diversification has been the basis of the UAE’s leading regional role in this area and has meant that it is now ranked among the most secure and stable nations (Standard & Poor’s UAE rating standing at “AA”, for 2015). The UAE is also ranked number one among the GCC countries in terms of economic diversification – versus the oil sector’s role in gross domestic product (GDP).

The UAE Ministry of Economy (MoE) aims to increase the industrial sector’s GDP contribution to 25 per cent, by 2021. The UAE government’s ambitious strategy to reinforce the industrial sector’s role in its economy is seen as a significant contribution to the diversification of income resources – the industrial sector is already the second largest contributor to the UAE’s gross national product (GNP), after oil and gas.

Dubai’s oil and gas sector contribution to its GDP decreased to just two per cent by the end of 2015, reflecting the outcome of its economic diversification policy. It should be noted here that the reduction of oil revenue has impacted on economic activities, though this has proven to be lower than its impact on the economies of neighbouring GCC countries.

KSA

Al Mazaya’s Report has indicated that the economic sector is among the key development priorities in the Kingdom of Saudi Arabia (KSA). In this context, the kingdom’s plans are expanding in the field of mineral exploration – in particular copper mining, which is currently the third largest contributor to the kingdom’s economy, after oil and petrochemicals. New mineral deposits and discoveries in KSA now represent a significant part of the government’s plans to diversify and expand production activities, as well as to provide a platform for investment opportunities from both domestic and foreign capital.

Based on the recent oil price fluctuations – predominantly in decline in recent years – the kingdom’s income has been negatively affected. Therefore, it is necessary to diversify income sources in the Saudi economy and shift from full reliance on oil to diversified resources. Non-oil exports have increased by 8.6 per cent, exceeding SR186 billion in 2015, while the kingdom’s export of petrochemicals has increased by 9.2 per cent, exceeding SR143 billion, for the same year.

Al Mazaya’s Report supports the economic and income diversification reflected in GCC countries’ 2016 budgets, yet there continue to be variations in plans, targets and timing that may require increased cross-border co-ordination.

The UAE and Qatar are currently leading the way in this field whereas KSA and Kuwait are developing their capabilities for diversification through a number of short and medium-term strategies. The Saudi budget aims to reduce an unprecedented budget deficit through retrenchment and the introduction of essential reforms into energy support mechanisms, with attempts to increase revenue from taxes and privatisation seen to be key.

Many observers and experts have suggested that KSA’s current budget reflects a positive way to address financial and economic reform, while others see that the actual decline in the volume of expenditure will be more severe than that reflected by the budget – based on current spending. It should be stressed here that the pace of reform in the country remains slow and that even current initiatives will take years before positive results can be seen to have any significant effect.

Qatar

The consequences of decisions on diversification of income are quite clear in the Qatari economy, which has depended on local and foreign expansion of all financial and economic activities for several years. In spite of the decline in oil returns, the Qatari economy has continued its growth and progress to become the second fastest growing economy in the world, at a rate of 7.1 per cent, by end of 2015. This is an indication that the Qatari economy has not been as adversely affected by the low oil returns as some of its neighbouring countries.

It is noteworthy that the Qatari economy is now regarded as one of the most competitive economies – worldwide – being ranked 13^th on a list for global competitiveness, last year, and second among the Arab countries after the UAE. Therefore, Qatar has clearly seen significant advances in terms of economic performance and efficiency, business efficiency and development of its infrastructure. Al Mazaya’s Report expects the Qatari economy will maintain similar growth rates in 2016 with a continued growth of non-oil activities.

Investment spending, an extensive and comprehensive economic policy, population growth, the improved contribution of the non-oil sector to its GDP and plans and targets for the private sector will help stimulate this – all of which witnessed healthy growth, in 2015. In addition, Qatar is implementing an ambitious strategy regarding the diversification of income sources, relying on sovereign investments that are currently estimated at USD250 billion.

Tourism and non-oil sector investment strategies

Al Mazaya’s Report considers the tourism sector in the GCC countries to be a key factor for maximising short to medium-term returns and a significant conduit for attracting non-oil sector domestic and foreign investment. Strategies of the region’s countries, working within this framework, will see each country looking to highlight its distinctive advantages for acquiring an increased share of the international tourism market.

Currently, the UAE is ranked second in the Middle East and North Africa (MENA) region, with direct GDP contributions from the travel and tourism sector estimated at AED61 billion, a growth rate of 4.9 per cent in 2015. This occurs in light of the rise in the total value of investments in the travel and tourism sector by 13.5 per cent.

Within the framework of reinforcing non-oil revenue returns in the GCC countries, the Qatari tourism sector contributed QR13.6 billion to its domestic GDP, which now equals around four per cent of the non-oil sector. With increasing investment being driven into its tourism sector, it is expected that Qatar will continue to become an important destination for tourists from all over the world.

The Sultanate of Oman has also recently managed to improve its status as a tourist destination, with the sector driving GDP to approximately 2.2 per cent, by end of 2015.

The medium-term plans and strategies of the Kingdom of Bahrain have shown even further increases in the percentage of the travel and tourism sector and its GDP contribution, with 17.4 per cent the target expected by 2021.

Al Mazaya’s Report indicates that the industrial sector’s development plans will take a longer period to improve its contribution to GDP in the GCC countries. It should be highlighted here though that the UAE’s benchmark of 25 per cent, for industrial sector GDP contributions, is an aim being adopted by most GCC countries, by the beginning of 2021.

Saudi investments in the field of industrial sector development reached SR156 billion, in 2015, with the objective of increasing the sector’s contribution to 20 per cent of domestic GDP, by end of 2016. Al Mazaya’s Report argues that in realising such goals, the impact on the level of economic and income source diversification will be significant and the capability of GCC states to face market volatility, through increased competitiveness, diversification and a greater presence in foreign markets will be assured.